When running a business, whether it’s a large corporation or a small, one-person company, finances are extremely important. For those who are new to self-employment, it’s often the financial aspects of business which can seem the most alien, at first. Depending on your circumstances, you may have to deal with payroll, corporate tax, VAT, as well as the day-to-day ins and outs of buying and selling. It’s easy to feel overwhelmed and mistakes can happen. One way to combat any potential discrepancies with your finances is through bank reconciliation. Bank reconciliation is the process of cross-referencing financial information provided by the bank, with your own records. You can then compare this data and potential issues can be flagged and dealt with.
What is Bank Reconciliation?
As the name suggests, bank reconciliation involves reconciling your own internal records, with the data provided by the bank. As many of us know, the bank will provide financial information in the form of statements. These will include key details on both the incomings and outgoings of your account. Businesses will also keep their own internal records, usually in the form of a general ledger or cash book. Ideally, both sets of financial records will match and there will be no discrepancies. Unfortunately, due to the nature of running a business, there will sometimes be issues which need to be rectified and bank reconciliation allows you to identify them.
How Often?
Bank reconciliation is a useful tool when organising business finances, however it’s only effective when it’s completed regularly. How often will depend on the business and its overall approach to the process. Some businesses will complete a reconciliation yearly, in the same way in which they approach taxes. Other companies will favour a quarterly approach. However, general consensus is that businesses should try to complete bank reconciliation, at least once a month. Not only does this coincide with monthly bank statements but it also allows businesses to tackle issues before they become bigger problems.
How Can it Help?
There are a variety of issues that reconciliation can help to identify. Of course, the most straightforward being a simple error, whether that be a human error or a technical one. This is important because mistakes, no matter how small, can lead to discrepancies with payments. For example, you may account for a payment internally but the bank statement shows that it has bounced. A missed payment can lead to credit issues, damage to reputation or even penalties. This is just one instance in which a simple mistake can be highlighted and fixed, thanks to reconciliation.
As well as innocent mistakes, there are other issues which can affect finances and these can be much more serious. For example, if an employee or partner was stealing from the business, this can be easy to overlook. However, when comparing internal documents with bank statements, it’s much easier to notice unusual payments.
Similarly to theft, businesses need to protect against identity fraud. This can be particularly difficult to notice, especially when we consider tactics such as duplicate payments or cheques. In fact, many fraudsters rely on the fact that businesses don’t double check their finances. This is another reason why regular bank reconciliation is so important.
Accurate record keeping is another factor to consider- especially during tax season. Bank reconciliation ensures that all of the financial information that you have collected and submitted to HMRC is correct. This protects against potential investigations and penalties.
Bank reconciliation may seem like yet another arduous financial responsibility when running a business but it’s an important and useful tool for protecting your company against fraud and error.
Fund Flow provide comprehensive financial services, including advice on bank reconciliation. If you’re looking for help, feel free to contact them directly.
